Finance

Five years after the collapse of the U.S. investment bank Lehman Brothers, the world has still not addressed the fundamental cause of the subsequent financial crisis – an excess of debt. And that is why economic recovery has progressed much more slowly than anyone expected (in some countries, it has not come at all).

What have we learned about the American political economy from the crisis and its aftermath?

What happens when professionals lose touch with the people they’re supposed to serve?

Let Them Eat Credit: Has Financial Capitalism Failed the World?

Can China lead the way on innovation?

Every nation faces the challenge of imagining what a good life means. Sound nutrition, shelter, health care, personal safety, social stability, security of savings, clean air and water, and the development of children are among the elements of what many envision as vital to a happy and healthy society.

The global financial cycle has transformed the well-known trilemma into a ‘dilemma’. Independent monetary policies are possible if and only if the capital account is managed directly or indirectly. This column argues the right policies to deal with the ‘dilemma’ should aim at curbing excessive leverage and credit growth. A combination of macroprudential policies guided by aggressive stress‐testing and tougher leverage ratios are needed. Some capital controls may also be useful.

We are coming up to the fifth anniversary of the Lehman crash in September 2008. How bad was it? Have we fixed the problems?

economists still conceive of law too narrowly, mainly as a means to reduce transaction costs and protect investors.

What does the bankruptcy of Detroit say about the US social contract?

The shortage of liquidity in the interbank market in China has sparked off a fear of “monetary famine.” This seems rather odd when the national savings rate is 50 per cent of GDP

Recent austerity policies have been guided by ideology rather than research. This column discusses research that reconciles disparate estimates of fiscal multipliers in the literature. It finds that common identification assumptions are problematic. Matching methods based on propensity scores show how contractionary austerity really is, especially in economies operating below potential.

Did the global economic collapse in 2008 stem from structural failures in the capitalist system?

“How could Michigan officials possibly talk about cutting the average $19,000-a-year pension benefit for municipal workers while reaffirming their pledge of$283 million in taxpayer money to a professional hockey stadium?

Is China is “too big to fail.”?

In this short interview, Institute co-founder George Soros tackles the question at the heart of the Institute’s mission: What’s wrong with economics and what can we do to change it?

To what extant do existing mainstream models properly address issues such as heterogeneity and interactions, which are considered central ingredients to understand economic crises as emergent, endogenous phenomena.

How does debt influence growth?

Recovery from recessions takes longer than it has in the past.

The recent debate about the reproducibility of the results published by Carmen Reinhart and Kenneth Rogoff offers a showcase for the importance of replication in empirical economics.

The proliferation of China’s opaque, loosely regulated (or unregulated) shadow-banking system has been raising fears of possible financial instability. But just how extensive – and how risky – is shadow banking in China?

Reinhart and Rogoff’s 2010 paper “Growth in a Time of Debt” has recently come under scrutiny

INET Advisory Board members Carmen Reinhart and Kenneth Rogoff today issued a response to recentcriticism of their paper “Growth in a Time of Debt.” Their response in full is below.

These are extraordinary times for central banks. Near zero interest rates and massive liquidity injections are still failing to bring life back to so many economies in the developed world.

“Look! Up there in the sky! What is it? Is it a plane? Is it a bird?” No, it’s a distraction from the robbery that is taking place in broad daylight on the ground.

Innovation. The word is evocative of ideas, products and processes which have somehow made the world a better place. Prior to the global financial crisis, many viewed financial innovation as unequivocally falling into this category.

The exteriors of major central banks may be solid marble and doric columns, but, inside, monetary policy remains a work in progress.

Only a few years ago, comparisons of American politics to opéra bouffe were not outrageously farfetched at least if you were not poor or sick.

Since the dawn of this millennium, and long before the current financial turmoil and the subsequent bitter pill of austerity therapy hit the Untied States and the European Union, the Chinese Communist Government has publicly recognized the monumental challenge of polarity.

“Taking advantage of the opportunity offered by the structural adjustments of the global economy…”The decisions on the four modernisations taken at the Third Plenum represented a radical change in Chinese domesticdevelopment strategy.

Political meritocracy is the idea that a political system is designed with the aim of selecting political leaders with above average ability to make morally informed political judgments. That is, political meritocracy has two key components: (1) the political leaders have above average ability and virtue and (2) the selection mechanism is designed to choose such leaders.

A core puzzle in Önancial economics is the inability of standard risk-premium models to account for excess returns in currency and other asset markets.

The global financial crisis led to the rediscovery of ‘fundamental uncertainty’. Incorporating uncertainty into the analysis of financial markets alters our understanding of how these markets operate and expose the two-faced role of law in finance.

There is much anecdotal evidence in the popular media, backed up by survey research, that participants in currency markets pay close attention to fundamental economic variables in forming their forecasts of future exchange rates.

For macroeconomists, an individual is rational if she uses her understanding of the way the economy works in making decisions that do not conflict with her objectives.

The present-value model of stock prices is a workhorse in financial economics. The model relates today’s price of a stock (or a basket of stocks) to the market’s forecasts of next-period’s price and dividend, appropriately discounted.

In this paper, we examine one of the core puzzles in International Macroeconomics, the so-called “forward-discount anomaly.”

A core premise of contemporary economic models is that researchers can adequately specify in probabilistic terms how individuals alter the way they make decisions and how the processes underpinning market outcomes unfold over time.

The first part of this text comes back on the standard economic viewpoint on expectational coordination, a viewpoint that the recent events have challenged.

State and market are often depicted as distinct, even antagonistic. Markets appear as natural products of spontaneous ordering; states as leviathans that if left untamed will distort, if not destroy markets’ natural state.

Uncertainty is an unavoidable feature of economic life, although we may cope with it sometimes by ignoring it. Institutions, conventions and behaviour are all conditioned by uncertainty, and they in turn condition uncertainty in a reflexive manner.

The reason why the Euro zone crisis has dragged on for so long is that Europe’s leaders have focused too much on short-term measures to patch up the emergency of the moment, rather than formulating a comprehensive plan.

After the announcement of Mario Draghi, the ECB president, to do “whatever it takes” to preserve the integrity of the European Monetary Union (EMU) in July 2012 and the establishment of the Outright Monetary Transactions (OMT) program in September 2012, the crisis of EMU is far from being resolved.

Mercantilism, Accumulation of Foreign Exchange Reserves, and RMB Internationalization

Regulation and supervision of banks and financial markets are now upgraded in the euro area. Surveillance of macroeconomic performance of all EU countries is also intensified.

In the first ten chapters of our book, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It, we discuss banking and the economics of funding as it applies to banks.

Europe can choose its musical accompaniment. In Berlin, 50 Cent’s All Things Fall Apart has just had its premiere. Or go back to Giuseppe Verdi, born two hundred years ago.

Internationalization of the renminbi is a stated goal of the Chinese government, its brief flirtation with Special Drawing Rights and an Asian Currency Unit notwithstanding. Chinese officials understand that a dollar-centric international monetary and financial system is a mixedblessing.

The Institute for New Economic Thinking held its annual plenary conference in Hong Kong from April 4-7, 2013 at the InterContinental Hotel in Kowloon. The event discussed Asia’s emergence in the global economy and other core issues.

Healthy innovation economies are the main driver of prosperity in the 21st century. But the three players that have traditionally sponsored basic research and invention in those economies are no longer willing or able to perform that role.

The developed economies of Europe, North America, and Japan are facing tremendous challenges related to indebtedness and stagnation. How will the developing economies of Asia respond to this challenge as they reorient their growth strategies to meet the rising aspirations oftheir people?

The Foundations of Economic Prosperity: The Lessons of Innovation Process and History

My remarks today will be focused primarily on features of the developed world’s financial system which led to the crisis of 2008 and to the Great Recession that followed, from which we are only slowly and painfully emerging.

In his recent lecture at the Cass Business School, Lord Turner noted that even mentioning the possibility of overt monetary financing was akin to breaking a taboo.

Shadowy banking is safety-net arbitrage. It employs substitutes for products and activities performed within the traditional banking sector.

All of a sudden, tiny Cyprus is making headlines. How could such a small country, with an economy approximately the size of the State of Maranhao, create such big problems?

Further system reforms will enable China to overcome middle-income trap and push forward social progress

What happens when there’s no leader in the global economy?

There is a certain rich irony attached to the sight of corrupt Russian oligarchs now posing as liberal champions of the rule of law as they find themselves sucked into the maelstrom of Cyprus’s ongoing financial crisis.

This paper considers a puzzle in growth theory from a Keynesian perspective.

Why all of the fuss about a nonexistent emergency?

That’s the question that Adair Turner, Chair of the UK Financial Services Authority, was addressing in his lecture to Cass Business School this week.

Eric Beinhocker and Tony Dolphin argue that lasting reform to the financial sector will not be achieved without tackling the price rigging and anti-competitive behaviour that is rife in the industry.

The Azim Premji University-Institute for Economic Thinking Advanced Graduate Workshop in Poverty, Development and Globalization is interested in identifying the complex global interactions that influence poverty and development as well as the development strategies that have proven successful in promoting equitable growth, promoting capabilities, and reducing poverty.

This research project extends proven techniques in statistical learning theory so that they cover the kind of models and data of most interest to macroeconomic forecasting.

This research project considers and casts doubts on the stationarity properties of macroeconomic data that are key to New Classical models with implications for the understanding of long-term economic growth, shorter term business cycles, stabilization policy, and industrial and development policy.

This research project aims to better understand the impact of various forms of central bank communication by blending techniques from psychology and political science.

This research project provides the mathematics for a second marginal revolution enabling the natural modeling of heterogeneous agents with unstable beliefs, fully dynamic preferences, and allowances for an increased level of self-inconsistency.

This research project creates a computational model of the current financial crisis to discover the essential elements needed to reproduce the crisis, while investigating alternative policies that may have reduced its intensity and strategies for recovery.

This research project uses spatial cross-sectional variation in addition to time series variation to estimate fiscal multipliers; the impact of anti-predatory lending laws on housing prices, default rates, and foreclosures; and the impact of raising wages during recessions.

This research project explores how the output of firms outside of the financial sector is affected by the health of the banks and other financial institutions.

This research project explores ways to influence policy, starting with selected UK regulators, pension funds, and asset management groups, by testing the feasibility of “emotional finance” solutions to the prevention of future financial crises.

This research project examines the relationship between the creation of money, price formation, and income flows, assuming no restrictions to the volume of credit, while abstracting from the existence of speculative crises and the role of the public sector in the process of monetary creation.

We derive generalization error bounds — bounds on the expected inaccuracy of the predictions — for traditional time series forecasting models.

The European periphery is qualitatively dierent from the core.

Ireland has experienced a series of interlocking banking, fiscal, unemployment and political crises since 2007.

The Eurocrisis has many dimensions—bank solvency crisis, sovereign debt crisis, political unity crisis, and economic/unemployment crisis—but time after time it has been the liquidity crisis dimension driving events, and ECB response to the liquidity crisis driving institutional evolution. The reason is simple. Liquidity kills you quick.

Two Nobel laureates, an election, and a shaky economy. The message? We can do a whole lot better.

What do you get when you put two of the most well known and most widely cited economists in the world, both Nobel laureates, on stage together? A healthy dose of economic reality.

China released quarterly GDP figures this week. Wen Jiabao emphasized the parts of the release that pointed toward stabilization, and one can certainly find some logic to that view.

What makes a good model?

Everyone wants to ring-fence something, but they can’t agree on what: Vickers, Liikanen, Volcker.

Everyone wants to ring-fence something, but they can’t agree on what:

Recent empirical findings suggest that macroeconomic variables are seldom normally distributed.

Ambiguous private information leads to informational inefficiency of asset prices in rational expectations equilibrium.

Can economics be morally centered? And perhaps more importantly, should it be?